I am invested in vanguard Target 2020, while the total market fund has a drop of 1.2% and total international fund had a drop of less than 1%, Target 2020 had a drop of 2.72%.
Does any one know what the reason is for such a big drop?
Thanks

parsi1 wrote:I am invested in vanguard Target 2020, while the total market fund has a drop of 1.2% and total international fund had a drop of less than 1%, Target 2020 had a drop of 2.72%.
Does any one know what the reason is for such a big drop?
Thanks

Parsi1

Yesterday, December 27, was the Distribution Record Date for Vanguard's Target Funds. This means the Net Asset Value declined by the amount of the distribution. Fund holders total value remains unchanged.

parsi1 wrote:The distribution is suppose to be dividend, dividends are not suppose to bring the net asset down. If the net asset remain the same after the distribution, what happened to the dividend

That is incorrect. The NAV of the fund will decline by the amount of the distribution - be it capital gains or dividend income. If you choose to reinvest, the AUM (your assets under management within the fund) will remain the same. If you choose to abscond with the cash - well that has the effect of reducing the value of your investment. To answer your other question - if the NAV remains the same after the distribution - that means that the value of the funds securities appreciated by the exact amount of the distribution - now imagine, just how much the value of your account would have risen had you reinvested your dividends!

Investopedia explains 'Ex-Dividend'
A stock trades ex-dividend on or after the ex-dividend date (ex-date). At this point, the person who owns the security on the ex-dividend date will be awarded the payment, regardless of who currently holds the stock. After the ex-date has been declared, the stock will usually drop in price by the amount of the expected dividend.

Is this a mutual fund thing or a US thing because I got dividends from 2 of my locally based ETFs yesterday and they both went up. I don't believe I have seen a drop equal to a dividend in anything other than my US domiciled holdings.

Also the monthly dividend from bond mutual funds are different, too. And to be confusing, bond mutual funds can and do have year-end distributions that are separate from the December monthly dividends.

For educational fun, plot the 5-day chart for a few ETFs with recent large distributions like BIV, VBR, and VSS.

Sorry, but where is the advantage of all these divided reinvestment that we have been hearing. The net asset stays the same before and after the dividend distribution. So you don’t have any gain due to the dividend?

parsi1 wrote:Sorry, but where is the advantage of all these divided reinvestment that we have been hearing. The net asset stays the same before and after the dividend distribution. So you don’t have any gain due to the dividend?

Investment companies, such as mutual funds, are required by law to distribute all net earnings from dividends, interest, security lending, and capital gains to shareholders or pay income tax on any retained earnings.

Bond funds can distribute short term and/or long term gains. Here are the 2012 distributions from bond etfs:

parsi1 wrote:Sorry, but where is the advantage of all these divided reinvestment that we have been hearing. The net asset stays the same before and after the dividend distribution. So you don’t have any gain due to the dividend?

US mutual funds are required, by law, to distribute dividends (and realized capital gains) at least yearly; these distributions are then taxed. Some other jurisdictions do not require this and so favor owners of mutual funds (or the local equivalent) as compared to direct investors.

parsi1 wrote:Sorry, but where is the advantage of all these divided reinvestment that we have been hearing. The net asset stays the same before and after the dividend distribution. So you don’t have any gain due to the dividend?

Correct me if I'm wrong, but you now own 2.5% more shares than you have previously. This increase will contribute to the compound interest snowball that will accumulate, as these additional shares will now (hopefully) accumulate interest and pay dividends down the line.

bowlja wrote:I freaked out today when I saw a 2.78% drop when the market reflected a much smaller decline.

Dividend issue aside... Have you thought about what you will do when the fund drops 20%? This stmt seems to show that your expecting more stability then what MIGHT happen.

I would not "freak out" if the entire market had dropped 2.78%. What surprised me was that the market showed a roughly 1% drop while my investment showed a 2.78% drop. As I indicated in my first post, I am relatively new to this but... I have never seen my investment drop more than the market dropped and I was concerned "freaking out" about the discrepancy.

Considering the current political and economic environment, stability doesn't seem likely until we can buy CD's at 8% like they could 20 years ago.

Thanks for all the help and replies.
My understating/(or misunderstand) was that I always thought dividend is like interest on you investment. I didn't think that dividend reduced the company or mutual funds net asset so the stock should drop for the same amount. thanks for clearing that.

That's still not quite the way I understand it. The dividends are embedded in the NAV or fund share price all along.

For example, suppose that on December 3rd a stock held by your fund paid a dividend which made your fund shares 1 cent more valuable. In that case the fund managers just increased the NAV or share price of your fund by 1 cent. That is, the dividend from the stock is like interest on an investment.

Because of the law, at year-end the fund has to account for all the dividends and net capital gains it has generated and report them to the folks who own the shares. That's what these distribution events in December are about. So the managers take out the value of the distribution and give it back to you. It is like me having a $10 bill in my pocket and getting it changed in to 10 $1 bills. The fund manager says here's $9 plus $1 of dividends. It's still $10 to me.

parsi1 wrote:Thanks for all the help and replies.
My understating/(or misunderstand) was that I always thought dividend is like interest on you investment. I didn't think that dividend reduced the company or mutual funds net asset so the stock should drop for the same amount. thanks for clearing that.

I have $10 in my pocket. I give you $4. How much is left in my pocket? The NAV of my pocket dropped from $10 to $6 when I gave you the $4. A fund is just like my pocket. If it pays something out, it doesn't have it anymore.

Now if I take $4 from the $10 in my left pocket and put it in my right pocket, then the NAV of my left pocket is down to $6, but I still have $10, somewhere.

I am new to Vanguard and have also invested in Target Retirement funds.

If you look at your online account today you will see that your dividend money is back and has been reinvested to buy more Target Retirement funds at a lower rate. This is good for you.

So... what I think happens is... let's say you have 100K in Target retirement funds.

$100,000.00 over 100,000 shares so NAV is $1.00 a share.

Dividends of $5000.00 are paid so NAV is now $95,000.00 over 100,000 shares so NAV drops to 95,000 / 100,000 or $.95 cents a share instead of $1.00 a share.

Now they take your $5,000.00 and buy shares at the reduced rate of $.95 cents a share which will get you 5263 new shares.

You now have 105263 shares at .95 cents a share = $100,000.00 which is the same $ amount you had before except now you own 5263 more shares than you did before so any gains will be compounded by the new shares. That is good for you.

As I said, I am new to this and hope my explanation is correct.

Hope this helps. Check out your account online and you will see that you have more share. Of course the overall value will be a bit lower because the market did drop on friday.

Am still confused about word 'dividends' as I know it. If there are no share gains or losses over the next 10 years, for instance, the total value of your investment is unchanged--so much for 'dividends'. Who cares if I have more shares, I haven't made any monetary progress, correct?

EternalOptimist wrote:Am still confused about word 'dividends' as I know it.

Is this an epistemological statement? How can you be confused about something that you know? I would assume most people are confused about things they don't know rather than things they do. I know I am (but what is the true nature of my knowing what I don't know?).

^Yes, you have made no money in the scenario you described. Doesn't that start to look like a high-yield bond fund or another fund that just pays out its principal?

Please note that I did not specify that ALL the "increase in NAV" was paid out. Perhaps only a portion of the increase in NAV over the preceding 12 months is attributed to dividends and realized cap gains and that portion was paid out. That would leave a portion of increase in NAV attributed to unrealized cap gains and the share price would grow commensurately.

EternalOptimist wrote:So let's say after 10 years where there has been no share growth I sell, my monetary payback is exactly the same? So, I own more shares but haven't made any money?

What? If the shares cost the same as when you bought them, but you have more shares, then you do have more money. Or you could have taken the dividends in cash rather than reinvesting, then you have the same number of shares at the same price, and a pile of cash from the distributions.

The change in NAV is an accounting feature. Otherwise, if the NAV didn't change due to dividends, one could buy the fund the day before distribution, collect the dividend, and sell it the day after. You'd get rewarded the same for holding it a few days as someone who held it all year.

Okay, let's try a more fundamental approach. Investment return has two components -- change in asset value and interest/dividends.

Over the course of the year, companies are making money. Neglecting changes due to speculation, the stock increases in value, because it is a fraction of a company which is making money. The directors of the company may choose to keep this profit and grow the company (shares maintain increased value) or they may choose to distribute some of it to shareholders as a dividend. In that case, the holder of each share will receive a certain fraction of the amount the company chooses to distribute. The stock shares will drop by that same amount, because the company no longer has that money -- the shareholders do.

The same thing happens in a mutual fund, just one level up. The mutual fund is a shareholder of the stocks, and receives the dividend. The fund previously held a certain number of shares; they now hold shares which are worth less than they were, plus the cash which was distributed to them as the shareholders. The "net asset value" hasn't changed, because the total is the same. The fund may also have income in the form of realized capital gains by selling shares which have increased in value, which is an artifact of the fund buying and selling and independent of stock dividends.

Periodically, the fund must distribute the net amount of dividends and capital gains it has received from the stocks it holds. Just like with individual stocks, the NAV of a share of the fund drops, because the fund no longer has the money (an "asset") which it distributed. However, you as the shareholder have the same amount you did -- shares with a reduced value, plus distributed cash.

Vanguard, like most providers, enables you to purchase new shares with the cash you've received, in which case the total amount you have invested won't change.

This question comes up a lot. But people are only explaining the sudden drop, but not the gradual increase in between distributions. Consider this. Suppose a fund has a 3.65% dividend each year. Then it increases by about 0.01% each day. That's where you are earning your dividends. If you invested $10,000, then on 364 days you would earn $1/day in the form of increased NAV. Then once a year you'd get a $365 dividend and the fund would drop $364. If nothing else changed the value of the fund the a graph of NAV would look like a Sawtooth wave.

Dividends on stocks or stocks funds are worthless IMO. They pay you a 2% dividend for example and the fund drops 2% the same day to compensate. IMO they paid you nothing. All they did was make you pay taxes. That's why tax efficient stock funds choose a lot of stocks that do not pay dividends.

Most bond funds are different at the end of the month they give you more cash or more shares (worth cash) and the fund does not drop in price. That is a real dividend!

pteam wrote:Dividends on stocks or stocks funds are worthless IMO. They pay you a 2% dividend for example and the fund drops 2% the same day to compensate. IMO they paid you nothing. All they did was make you pay taxes. That's why tax efficient stock funds choose a lot of stocks that do not pay dividends.

Most bond funds are different at the end of the month they give you more cash or more shares (worth cash) and the fund does not drop in price. That is a real dividend!

In your example they are not worthless, they are worth 2% of your holding.

pteam wrote:Dividends on stocks or stocks funds are worthless IMO. They pay you a 2% dividend for example and the fund drops 2% the same day to compensate. IMO they paid you nothing. All they did was make you pay taxes.

No. The fund NAV increased over the year in proportion to the dividend payout. If you held the fund all year you end up with the original investment plus the dividend (minus any taxes). I'm not sure why people are having trouble with this.

pteam wrote:Dividends on stocks or stocks funds are worthless IMO. They pay you a 2% dividend for example and the fund drops 2% the same day to compensate. IMO they paid you nothing. All they did was make you pay taxes.

No. The fund NAV increased over the year in proportion to the dividend payout. If you held the fund all year you end up with the original investment plus the dividend (minus any taxes). I'm not sure why people are having trouble with this.
Brian

Right. The bond fund's NAV does not go up during the month, which is why it doesn't go down when the dividend is paid. And the bond fund's dividend is non-qualified so is taxed at a higher rate than the stock fund.

Default User BR wrote:No. The fund NAV increased over the year in proportion to the dividend payout. If you held the fund all year you end up with the original investment plus the dividend (minus any taxes). I'm not sure why people are having trouble with this.
Brian

Right. The bond fund's NAV does not go up during the month, which is why it doesn't go down when the dividend is paid. And the bond fund's dividend is non-qualified so is taxed at a higher rate than the stock fund.

It should be clarified that if you buy the stock fund right before the distribution, then it will be similar to what some of the others think. You will end up with a taxable dividend and a capital loss. For that reason, it's generally recommended not to buy the fund at that time in a taxable account. It doesn't matter in tax-advantaged of course.